Talking about a January shock again:
[D] AI Policy Group CAIDP Asks FTC To Stop OpenAI From Launching New GPT Models
Via the agile u/ vadhavaniyafaijan :
The Center for AI and Digital Policy (CAIDP), a tech ethics group, has asked the Federal Trade Commission to investigate OpenAI for violating consumer protection rules. CAIDP claims that OpenAI’s AI text generation tools have been “biased, deceptive, and a risk to public safety.”
CAIDP’s complaint raises concerns about potential threats from OpenAI’s GPT-4 generative text model, which was announced in mid-March. It warns of the potential for GPT-4 to produce malicious code and highly tailored propaganda and the risk that biased training data could result in baked-in stereotypes or unfair race and gender preferences in hiring.
The complaint also mentions significant privacy failures with OpenAI’s product interface, such as a recent bug that exposed OpenAI ChatGPT histories and possibly payment details of ChatGPT plus subscribers.
CAIDP seeks to hold OpenAI accountable for violating Section 5 of the FTC Act, which prohibits unfair and deceptive trade practices. The complaint claims that OpenAI knowingly released GPT-4 to the public for commercial use despite the risks, including potential bias and harmful behavior.
China, Brazil reach agreement to ditch intermediary US dollar
China and Brazil have reached a deal to trade in their own currencies, ditching the US dollar as an intermediary, the Brazilian government said Wednesday.
The deal is expected to reduce costs, promote greater bilateral trade, and facilitate investment.
China is currently Brazil’s largest trading partner. China has similar currency deals with Russia, Pakistan, and several other countries.
Why does it matter? Because no currency lasts forever, and the dollar’s position as WRC (world reserve currency) is being challenged, in current events.
See the book that Peruvian Bull wrote on the topic, for further info: https://piousbox.com/author/peruvian_bull/
Calling All Apes in USA! The Senate Bill 686 “Anti-Tiktok” bill is coming for YOU! It needs to die!
On March 07, the bill to end all bills was introduced. This thing is Evil. Among other things The Senate Bill 686 Restrict Act:
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(starting with Section 3)Gives the Secretary of Commerce the ability to call anything on the internet(hardware or software) a “Undue risk” of [broad spectrum of poorly defined “Crimes”](essentially whatever the secretary wants) and slap up to 20 years prison and a 1 million dollar fine for anyone using it. I must remind our folks that the secretary of commerce is an unelected position that is picked by the president and set for life unless impeached.
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(Section 4) (subsection a) “The Secretary shall identify and refer to the President any covered holding that the Secretary determines, in consultation with the relevant executive department and agency heads, poses an undue or unacceptable risk to the national security of the United States or the security and safety of United States persons….”
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(Subsection c.1) ” …with respect to any covered holding referred to the President under subsection (a), if the President determines that the covered holding poses an undue or unacceptable risk to the national security of the United States or the security and safety of United States persons, the President may take such action as the President considers appropriate to compel divestment of, or otherwise mitigate the risk associated with, such covered holding to the full extent the 8 covered holding is subject to the jurisdiction of the United States… “.
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Do I even need to spell out why this is Bad? This isn’t even restricted to “foreign investment”, just and “Covered holdings”(see Section 2, subsection 3.B for definiton. it basically means “However the secretary of commerce defines it”).
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(Section 8 Sub-section d) Allows Lobbyists and special interest groups to be added to any committees the secretary appoints that determine what websites to ban. Let that sink in. For a hyperbolic example: Apple and Microsoft could hire a shit ton of lobbyists to be added to the committee determining whether Linux should be removed.
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(Section 11.a.2.2.F) BANS VPNS. Any action that could be construed as ” action with intent to evade the provisions of this Act”. This is so vague that even that it essentially bans all cybersecurity encryptions including VPNs, Onion Routing, Fucking SSL, and even having a Password because any of those can be spun as trying to avoid investigation under the bill.
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(Section 12 sub-section b) Removes any action the secretary and associated committees have taken under this bill from being subject to the Freedom of Information Act. This means the secretary of commerce and his cronies can make any government document immune to FOIA by declaring it part of an “ongoing investigation”.
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(Section 15 sub-section d) for those that don’t know ex parte means “used for one party to ask the Court for an order without providing the other party(ies) the usual amount of notice or opportunity to write an opposition.”. This, under the right circumstances, gives the prosecutor the right to submit information on a case without allowing the defendant time to make a defense. It also might imply the right to deny judicial review, but I’m probably wrong there(I hope).
All that and more.
Don’t believe me?
Here’s the bill for public viewing: https://www.congress.gov/bill/118th-congress/senate-bill/686/text
or here for no reason: https://docs.reclaimthenet.org/BILLS-118s686is.pdf
Or if you’re lazy, here’s the leader of the Right to repair movement tearing it a new one: https://www.youtube.com/watch?v=xudlYSLFls8
This thing needs to die. Unfortunately, it’s supported by All Political Parties in Office and is currently Backed by the White House.
Every American ape needs to Call/Text/Email/Snail-Mail/Sext/Telegraph their senators and representative…
Otherwise who do you think the Secretary of Commerce is going to be looking at post MOASS?
Find them here: https://www.congress.gov/members/find-your-member
And text them this way: https://resist.bot/ I.E.>Text RESIST to 50409. Answer the questions the bot texts you, and in about two minutes it’ll send your letter via text to your elected officials, like your members of Congress or state legislators.
The 10-K report states point-blank that the DTCC is MISREPORTING the number of shares it holds (updated)
u/ Darkhoof shares (for free!) the below. The 2023-03-29 update is pasted at the bottom.
The 10-K report uses very different wording from previous 10-Q and even the previous 10-K report.
This report does not state the precise number of shares directly registered, as mentioned in the previous report. It mentions the number of shares claimed to be held by Cede & Co on behalf of the DTCC: 228.7 million. And that the remainder is held by record holders.
The use of the name of shares held by Cede & Co is the crucial part here. This is a VERY important detail. And I will show you why later. Lets start with the paragraph on the 10-K form:
Our Class A Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “GME”. As of March 22, 2023, there were 197,058 record holders of our Class A Common Stock. Excluding the approximately 228.7 million shares of our Class A Common Stock held by Cede & Co on behalf of the Depository Trust & Clearing Corporation (or approximately 75% of our outstanding shares), approximately 76.0 million shares of our Class A Common Stock were held by record holders as of March 22, 2023 (or approximately 25% of our outstanding shares).
Lets compare this with previous DRS number statements as per the 10-Q forms in Gamestop’s investor relations website:
Q3 2022
As of October 29, 2022 and October 30, 2021 there were 7.3 million and 4.4 million, respectively, of unvested restricted stock and restricted stock units. As of October 29, 2022 and October 30, 2021 there were 311.6 million and 308.0 million, respectively, of shares of Class A common stock that are legally issued and outstanding or are unvested restricted share units that represent a right to one share of Class A Common Stock. As of October 29, 2022, 71.8 million shares of our Class A common stock were directly registered with our transfer agent.
Q2 2022
As of July 30, 2022 and July 31, 2021 there were 5.5 million and 3.6 million, respectively, of unvested restricted stock and restricted stock units. As of July 30, 2022 and July 31, 2021 there were 309.5 million and 306.0 million, respectively, of shares of Class A common stock that are legally issued and outstanding or are unvested restricted share units that represent a right to one share of Class A Common Stock. As of July 30, 2022, 71.3 million shares of our Class A common stock were directly registered with our transfer agent.
Q1 2022
As of April 30, 2022 and May 1, 2021 there were 1.4 million and 2.6 million, respectively, of unvested restricted stock and restricted stock units. As of April 30, 2022 and May 1, 2021 there were 77.3 million and 71.9 million, respectively, of shares of Class A common stock that are legally issued and outstanding or are unvested restricted share units that represent a right to one share of Class A Common Stock. As of April 30, 2022, 12.7 million shares of our Class A common stock were directly registered with our transfer agent.
The wording in the 10-K is very interesting. First, they provide us with a precise number of record holders: 197,058. Then, they provide us with the (claimed) approximate number of shares held by Cede & Co on behalf of the DTCC: 228.7M. Finally, the approximate number of shares held by record holders.
Now who is included in the record holders? This is the definition in previous reports: https://investor.gamestop.com/static-files/5a610aaf-6606-4173-86a1-cba6abdb204a
What is a registered shareholder?
Registered shareholders, also known as “shareholders of record,” are people or entities that hold shares directly in their own name on the company register. The issuer (or more usually its transfer agent, such as Computershare) keeps the records of ownership for the registered shareholders and provides services such as transferring shares, paying dividends, coordinating shareholder communications and more. Shares can be held in both electronic (book entry) through the Direct Registration System (DRS) or certificated form (when permitted by the issuer company).
From previous DD we know this includes not only household investors with directly registered shares, but also insiders that hold them with the transfer agent.
However, one important detail is that mutual funds DO NOT HOLD shares with Cede & Co (as stated by the SEC itself). I repeat mutual fund shares ARE NOT HELD at Cede & Co. https://www.reddit.com/r/Superstonk/comments/xdayfk/i_asked_the_sec_if_etfs_index_funds_mutual_funds/
My Question:
Hi, I’ve been looking all over the place for an answer to this question and can’t seem to find a definitive answer. When ETFs purchase shares, are they registered in their own name at the transfer agent, or does it go through Cede & Co like regular brokers? Also, is it the same for other institutions, such as pension funds, mutual funds, index funds, etc..? Thanks!
SEC Answer:
Dear —-:
Thank you for contacting the U.S. Securities and Exchange Commission (SEC).
You ask whether shares purchased by ETFs, pension funds, mutual funds, and index funds are registered in their own name at the transfer agent or if they go through Cede & Co.
Mutual funds (including index funds) are not DTC-eligible (Depository Trust Company). They are purchased and redeemed (no secondary market) between brokers and mutual fund entities (technically transfer agents, often part of the fund organization, or a third-party processor). The National Securities Clearing Corporation (NSCC) has a platform called Fund/SERV and a related service called Networking that connect brokers placing and settling mutual fund orders with fund transfer agents.
Cede & Co is the nominee name for the DTC but Mutual Funds are not DTC-eligible. What does this mean?
https://www.nasdaq.com/glossary/c/cede
Cede & Co. Nominee name for The Depository Trust Company, a large clearing house that holds shares in its name for banks, brokers and institutions in order to expedite the sale and transfer of stock.
https://www.lexology.com/library/detail.aspx?g=ad927cbb-3afa-4df2-820b-53c7e687b4f2
Companies that regularly engage with securities are likely to interact with the Depository Trust Company (DTC). The DTC is the world’s largest central securities depository. Based in New York City, the the company is responsible for electronic record-keeping of securities balances. It also acts as a clearinghouse for securities trade settlements.
The Basics
Founded in 1973, the DTC’s goal is to improve efficiencies and reduce risks in the securities market. Most banks and broker-dealers are DTC participants. The Depository Trust and Clearing Company (DTCC), a holding company, owns the DTC.
The company manages book entry securities transfers. It also provides custody services for stock certificates. Book-entry refers to uncertificated securities. Users employ an electronic tracking system for purchasing, holding, and transferring book-entry securities. This contrasts with certificated securities, which have physical stock certificates associated with them. Most investors who use a broker hold securities in book-entry form. The two major U.S. stock exchanges, NYSE and NASDAQ, require all listed equity securities to be eligible for a direct registration system (DRS), an electronic book-entry system for recording securities ownership.
Cede & Company is the main custodial nominee that the DTC designates to be the holder of record of the securities it manages that are in its custody. Cede & Co. is a specialized financial institution. Securities will be deposited with or on behalf of DTC and registered in the name of Cede & Co., as the nominee of the company.
From the previous quarter where we know that 71.8 million shares were registered by household investors, we know that 32,875,174 are held by mutual funds according to computershared.net and Insiders hold at least 38,513,981. We can assume that some of the insiders hold them with the transfer agent, we just don’t know who does. WE KNOW, PER THE SEC’s OWN WORDS, THAT MUTUAL FUNDS SHARES AREN’T HELD BY THE DTC UNDER ITS CUSTODIAL NOMINEE CEDE & CO. THEY ARE NOT DTC-ELIGIBLE.
What this means is that from the 308 million shares available at least 110.31 million are not held by Cede & Co. But Cede & Co states they hold 228.7 million shares. The float is at 308 million shares. Where is this discrepancy coming from?
TLDR:
Therefore, my interpretation of the 10-K form can only be one: Gamestop with this 10-k form just stated to all the relevant financial authorities and to the entire world that Cede & Co are misreporting the number of shares they hold on behalf of the DTCC. They DO NOT hold Mutual Funds shares as stated by the SEC itself. If you remove mutual funds and household investor shares from the float only 197.69 (nice) million shares that Cede & Co could reasonably claim as being held by them.
Edit: there’s controversy if mutual funds stock holdings are held at Cede & Co or rather registered at/with the managing fund via the ACATS Fund/SERV system:
https://www.dtcc.com/wealth-management-services/mutual-fund-services/acats-fund-serv
My understanding considering the available information I’ve read and linked in the comments and the SEC’s reply leads me to believe in the later, not the earlier.
We need more DD into ownership structure of mutual fund stock holdings and how can it be abused by our opponents. Hopefully, Dr. Trimbath or Dave Lauer can chime in. Or maybe this is a rabbit hole that might excite some wrinkle brains.
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2023-03-29 update:
Lawyer ape here. Something doesn’t smell right…. Let’s do some critical reading of the 10-K
The honorable u/ lawdog7 writes:
A lot of trending posts are unequivocally stating that the DTC, DTCC, and/or Cede & Co. is/are the source(s) of the number of shares that are held in the name of Cede & Co as reported in the 10-k. Let’s first look at the only mention of Cede & Co. within the 10-K:
Our Class A Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “GME”. As of March 22, 2023, there were 197,058 record holders of our Class A Common Stock. Excluding the approximately 228.7 million shares of our Class A Common Stock held by Cede & Co on behalf of the Depository Trust & Clearing Corporation (or approximately 75% of our outstanding shares), approximately 76.0 million shares of our Class A Common Stock were held by record holders as of March 22, 2023 (or approximately 25% of our outstanding shares).
Source. (emphasis added)
So the (multiple choice) question is: who reported Cede & Co as being the holder of 228.7 million shares?
A.) that data is from Cede & Co, DTC, or DTCC
B.) that data is from GameStop
C.) that data is from the SEC
If you read most of the hot posts about this, you’d think the answer is A. But where does it say that? It doesn’t. If that were the case, Gamestop would/should have said something along the lines of “According to the DTCC” or “As reported by Cede & Co,” yet it is completely silent as to the source of that data so the answer is B.
The 10-k is Gamestop’s report. And unless stated otherwise, Gamestop is the source of the information or is adopting the information as true. That is because Gamestop cannot legally mislead investors or include any information that is materially false. Source (“The company writes the 10-K and files it with the SEC. Laws and regulations prohibit companies from making materially false or misleading statements in their 10-Ks. Likewise, companies are prohibited from omitting material information that is needed to make the disclosure not misleading. In addition, as noted above, the Sarbanes-Oxley Act requires a company’s CFO and CEO to certify the accuracy of the 10-K.”)
Accordingly, if the data was from the DTC, DTCC, or Cede & Co AND Gamestop knew it was false, it could not legally report it as it did. It would have to include a qualifier, such as “According to the DTCC, Cede & Co is the holder of 228.7 million shares.” This would be a true statement even if Gamestop knew that such a number was inaccurate because it is only stating what was reported by another entity and not vouching for the veracity of such a statement. (Although, if I’m the lawyer advising on this, I’d say they’d have to go a step further and include a disclaimer that they are not representing that such data is accurate and are including it only as reported by the DTC and without verification).
Because Gamestop reported the numbers without any qualifiers, the only conclusion we can draw is that Gamestop believes that number is correct as it would be in breach of a myriad of laws and regulations if it did not.
So why is the baseless conclusion that “Cede & Co is the source of the data” being pushed? I believe that it is being pushed because it is accompanied by the conclusion that DRS numbers are much higher than actually reported. This conclusion is erroneous for the same reasons as above (i.e. Gamestop cannot report information it knows to be false). And it is a dangerous conclusion for us to make because it decreases the motivation to DRS by encouraging social loafing.
WhY DrS whEN wE aLrEADdy HAvE mOrE tHAn eNoUgH sHaReS rEgIsTeREd?
The truth as we know it and as reported by Gamestop is that we have DRS’d about 25% of the shares outstanding. Becuase no other source is cited, that information is either from Gamestop or adopted by Gamestop as true (e.g. from Computershare and then adopted by Gamestop in the 10k). This is a huge accomplishment, and it should not be downplayed with baseless conclusions. The truth is our best friend and the worst enemy of the hedgies and their Mayo Overlord.
BUY, HODL, SHOP, AND DRS!!
Edit: just want to give my theory as to why GameStop changed the reporting language for DRS’d shares. IMO, there could be a good reason for doing so as it emphasizes something that we all know but most people do not: unless DRS’d, your shares are in the name of some obscure company called Cede & Co.
What did two banks say to each other?
Untitled (Angel #5)
A further discussion on the prices of gold
Anon contributes:
Re: the graph above. A slight correction to yesterday’s chart of gold prices, because I was like, wait, what? Did it really happen that way, that the price of gold was flat until 1971? So I looked up the gold price for 100 years, you can see it at https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart This graph looks accurate, I cross-checked against several sources.
The thickest gray vertical line is the Great Depression of 1929. Gold is a hedge (“insurance”) against the apocalypse itself – when everything is collapsing, gold remains a valuable rare commodity that is also necessary in production of electronics. As the Great Depression unfolded in 1930’s, people used gold to store value, and its price went up. A decade later, as people’s faith in government was slowly restored, they reduced their usage of gold as container of value, by half. In 5 more years, the shock of the Great Depression wore off and gold price returned to its then-balance of $400/oz. This seems reasonable. Gold also has its own economics: the largest gold mine sets the price worldwide.
But yeah, it appepars that the price of gold was indeed flat (excluding that one catastrophic exception) until the 70’s. Importantly, the first graph from yesterday seems to be gold price indexed to the nominal dollar. The graph from today is the gold price indexed to the real dollar (accounting for inflation). Observe the difference.
Lest We Forget: Why We Had [the 2008] Financial Crisis
Generously pasted from: https://archive.ph/n3plH
Steve Denning
Senior Contributor to Forbes
It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations.
How then could the Mayor of New York, Michael Bloomberg say the following at a business breakfast in mid-town Manhattan on November 1, 2011?
It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that. But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves.”
Barry Ritholtz in the Washington Post calls the notion that the US Congress was behind the financial crisis of 2008 “the Big Lie”. As we have seen in other contexts, if a lie is big enough, people begin to believe it.
Even this morning, November 22, 2011, a seemingly smart guy like Joe Kernan was saying on CNBC’s Squawkbox, “When the losses at Fannie and Freddie reach $200 billion… how can the ‘deniers’ say that Fannie and Freddie were enablers for a lot of the housing crisis. When it gets up to that levels, how can they say that they were only into sub-prime late, and they were only in it a little bit?”
The reason that people can say that is because it is true. The $200 billion was a mere drop in the ocean of derivatives which in 2007 amounted to three times the size of the entire global economy.
When the country’s leaders start promulgating obvious nonsense as the truth, and the Big Lie starts to go viral, then we know that we are laying the groundwork for yet another, even-bigger financial crisis.
The story of the 2008 financial crisis
So let’s recap the basic facts: why did we have a financial crisis in 2008? Barry Ritholtz fills us in on the history with an excellent series of articles in the Washington Post:
- In 1998, banks got the green light to gamble: The Glass-Steagall legislation, which separated regular banks and investment banks was repealed in 1998. This allowed banks, whose deposits were guaranteed by the FDIC, i.e. the government, to engage in highly risky business.
- Low interest rates fueled an apparent boom: Following the dot-com bust in 2000, the Federal Reserve dropped rates to 1 percent and kept them there for an extended period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).
- Asset managers sought new ways to make money: Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to high-yield mortgage-backed securities.
- The credit rating agencies gave their blessing: The credit ratings agencies — Moody’s, S&P and Fitch had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.
- Fund managers didn’t do their homework: Fund managers relied on the ratings of the credit rating agencies and failed to do adequate due diligence before buying them and did not understand these instruments or the risk involved.
- Derivatives were unregulated: Derivatives had become a uniquely unregulated financial instrument. They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims.
- The SEC loosened capital requirements: In 2004, the Securities and Exchange Commission changed the leverage rules for just five Wall Street banks. This exemption replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. This allowed unlimited leverage for Goldman Sachs [GS], Morgan Stanley, Merrill Lynch (now part of Bank of America [BAC]), Lehman Brothers (now defunct) and Bear Stearns (now part of JPMorganChase–[JPM]). These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage left little room for error. By 2008, only two of the five banks had survived, and those two did so with the help of the bailout.
- The federal government overrode anti-predatory state laws. In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks, including anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates increased markedly.
- Compensation schemes encouraged gambling: Wall Street’s compensation system was—and still is—based on short-term performance, all upside and no downside. This creates incentives to take excessive risks. The bonuses are extraordinarily large and they continue–$135 billion in 2010 for the 25 largest institutions and that is after the meltdown.
- Wall Street became “creative”: The demand for higher-yielding paper led Wall Street to begin bundling mortgages. The highest yielding were subprime mortgages. This market was dominated by non-bank originators exempt from most regulations.
- Private sector lenders fed the demand: These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to relax underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.
- Financial gadgets milked the market: “Innovative” mortgage products were developed to reach more subprime borrowers. These include 2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages.
- Commercial banks jumped in: To keep up with these newfangled originators, traditional banks jumped into the game. Employees were compensated on the basis loan volume, not quality.
- Derivatives exploded uncontrollably: CDOs provided the first “infinite market”; at height of crash, derivatives accounted for 3 times global economy.
- The boom and bust went global. Proponents of the Big Lie ignore the worldwide nature of the housing boom and bust. A McKinsey Global Institute report noted “from 2000 through 2007, a remarkable run-up in global home prices occurred.”
- Fannie and Freddie jumped in the game late to protect their profits: Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom. The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie. Indeed, these firms had no deposits, so they were not under the jurisdiction of the Federal Deposit Insurance Corp or the Office of Thrift Supervision.
- Fannie Mae and Freddie Mac market share declined. The relative market share of Fannie Mae and Freddie Mac dropped from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent as the bubble was developing in 2005-06. More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. The government-sponsored enterprises were concerned with the loss of market share to these private lenders — Fannie and Freddie were chasing profits, not trying to meet low-income lending goals.
- It was primarily private lenders who relaxed standards: Private lenders not subject to congressional regulations collapsed lending standards. the GSEs. Conforming mortgages had rules that were less profitable than the newfangled loans. Private securitizers — competitors of Fannie and Freddie — grew from 10 percent of the market in 2002 to nearly 40 percent in 2006. As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006.
The driving force behind the crisis was the private sector
Looking at these events it is absurd to suggest, as Bloomberg did, that “Congress forced everybody to go and give mortgages to people who were on the cusp.”
Many actors obviously played a role in this story. Some of the actors were in the public sector and some of them were in the private sector. But the public sector agencies were acting at behest of the private sector. It’s not as though Congress woke up one morning and thought to itself, “Let’s abolish the Glass-Steagall Act!” Or the SEC spontaneously happened to have the bright idea of relaxing capital requirements on the investment banks. Or the Office of the Comptroller of the Currency of its own accord abruptly had the idea of preempting state laws protecting borrowers. These agencies of government were being strenuously lobbied to do the very things that would benefit the financial sector and their managers and traders. And behind it all, was the drive for short-term profits.
Why didn’t anyone say anything?
As one surveys the events in this sorry tale, it is tempting to consider it like a Shakespearean tragedy, and wonder: what if things had happened differently? What would have occurred if someone in the central bank or the supervisory agencies had blown the whistle on the emerging disaster?
The answer is clear: nothing. Nothing would have been different. This is not a speculation. We know it because an interesting new book describes what did happen to the people who did speak out and try to blow the whistle on what was going on. They were ignored or sidelined in the rush for the money.
The book is Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature by Matthew Hancock and Nadhim Zahawi (published in 2011 in the UK by Biteback Publishing and available on pre-order in the US).
In 2004, the book explains, the deputy governor of the Bank of England (the UK central bank), Sir Andrew Large, gave a powerful and eloquent warning about the coming crash at the London School of Economics. The speech was published on the bank’s website but it received no notice. There were no seminars called. No research was commissioned. No newspaper referred to the speech. Sir Andrew continued to make similar speeches and argue for another two years that the system was unsustainable. His speeches infuriated the then Chancellor, Gordon Brown, because they warned of the dangers of excessive borrowing. In January 2006, Sir Andrew gave up: he quietly retired before his term was up.
In 2005, the chief economist of the International Monetary Fund, Raghuram Rajan, made a speech at Jackson Hole Wyoming in front of the world’s most important bankers and financiers, including Alan Greenspan and Larry Summers. He argued that technical change, institutional moves and deregulation had made the financial system unstable. Incentives to make short-term profits were encouraging the taking of risks, which if they materialized would have catastrophic consequences. The speech did not go down well. Among the first to speak was Larry Summers who said the speech was “largely misguided”.
In 2006, Nouriel Roubini issued a similar warning at an IMF gathering of financiers in New York. The audience reaction? Dismissive. Roubini was “non-rigorous” in his arguments. The central bankers “knew what they were doing.”
The drive for short-term profit crushed all opposition in its path, until the inevitable meltdown in 2008.
Why didn’t anyone listen?
On his blog, Barry Ritholtz puts the truth-deniers into three groups:
1) Those suffering from Cognitive Dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility.
2) The Innumerates, the people who truly disrespect a legitimate process of looking at the data and making intelligent assessments. They are mathematical illiterates who embarrassingly revel in their own ignorance.
3) The Political Manipulators, who cynically know what they peddle is nonsense, but nonetheless push the stuff because it is effective. These folks are more committed to their ideology and bonuses than the good of the nation.
He is too polite to mention:
4) The Paid Hacks, who are being paid to hold a certain view. As Upton Sinclair has noted, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
Barry Ritholtz concludes: “The denying of reality has been an issue, from Galileo to Columbus to modern times. Reality always triumphs eventually, but there are very real costs to it occurring later versus sooner .”
The social utility of the financial sector
Behind all this is the reality that the massive expansion of the financial sector is not contributing to growing the real economic pie. As Gerald Epstein, an economist at the University of Massachusetts has said: “These types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.” Yet in the expansion of the GDP, the expansion of the financial sector counts as increase in output. As Tom Friedman writes in the New York Times:
Wall Street, which was originally designed to finance “creative destruction” (the creation of new industries and products to replace old ones), fell into the habit in the last decade of financing too much “destructive creation” (inventing leveraged financial products with no more societal value than betting on whether Lindy’s sold more cheesecake than strudel). When those products blew up, they almost took the whole economy with them.
Do we want another financial crisis?
The current period of artificially low interest rates mirrors eerily the period ten years ago when Alan Greenspan held down interest rates at very low levels for an extended period of time. It was this that set off the creative juices of the financial sector to find “creative” new ways of getting higher returns. Why should we not expect the financial sector to be dreaming up the successor to sub-prime mortgages and credit-default swaps? What is to stop them? The regulations of the Dodd-Frank are still being written. Efforts to undermine the Volcker Rule are well advanced. Even its original author, Paul Volcker, says it has become unworkable. And now front men like Bloomberg are busily rewriting history to enable the bonuses to continue.
The question is very simple. Do we want to deny reality and go down the same path as we went down in 2008, pursuing short-term profits until we encounter yet another, even-worse financial disaster? Or are we prepared to face up to reality and undergo the phase change involved in refocusing the private sector in general, and the financial sector in particular, on providing genuine value to the economy ahead of short-term profit?
From the war room: reiterating on the battle of humanity vs capital
Anon writes:
?? Hello everyone! Y’all know how much I like to talk about this graph:
The very important question is: how come humans became a commodity, and what can we do about it?
Anyway, I just found another very interesting related graph:
^ that’s a graph of USA inequality. Higher means more inequality. Somehow as if by magic, in 1970’s inequality (in USA) started exploding, and hasn’t stopped. Yeah something happened in 1970’s, some battle was lost by the people.
If anyone has the time to read into it, how come humans are a commodity now, here is a good resource: https://economics.stackexchange.com/questions/15558/productivity-vs-real-earnings-in-the-us-what-happened-ca-1974
Disclaimer: I don’t know the answer. Neither how it happened, nor what to do about it now.
~ * ~ * ~ * ~
Yea, the main operating hypothesis remains that when the gold standard was abandoned in 1971, that’s when the battle of humans vs capital was lost.
( People are scared of AI and a terminator-style Skynet? The battle was already lost in the 70’s, but not against AI, against money itself! )
The solution would be to re-establish the gold standard. This battle is ongoing. The gold nowadays goes under the names of: Bitcoin and Ethereum.
And if you think that the claim that “money destroys humanity” is silly, consider this. The gross product of the world is $100T [1]. Banks hold $200T in derivatives [2], unregulated and unreported. That’s enough to run the world two times over. Total derivative notional value is estimated at $600T nowadays [3] – enough to run the world over, six times. A mortgage is commonly issued for 30 years. And derivatives can be continuously rolled for decades, forever.
References:
* [1] https://en.wikipedia.org/wiki/World_economy
* [2] https://www.usbanklocations.com/bank-rank/derivatives.html
* [3] https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2022/
I believe that these derivatives hold the stolen wealth of dead 70’s people. Central banks have infinite liquidity, so bankers only had to stash the stolen wealth in a promise, and pay out the promise to themselves (using a swap).
Blockbuster, as an example, is our favorite bankrupt company. They went bankrupt in 2010, that was 13 years ago. So is it over? No, the promise still needs to be held on the books, for operational reasons. And would you look at that – Blockbuster is still being traded, at a quarter-cent per share: https://finance.yahoo.com/quote/BLIAQ And there are thousands of such un-dead companies. (Of course, it’s easier with people and mortgages, because people simply die.) ??